Relevant and even prescient commentary on news, politics and the economy.


This chart was published the Division of Labor Blog and is getting a lot of references in the libertarian blogs.

But it is an example of the danger of a little knowledge. OSHA was created under Nixon as part of his “Simplifying Government Initiative”. The creation of OSHA was just a bureaucratic reorganization that involve no new laws or hiring of additional regulator.

Over the years Congress passed laws at various times regulating safety measures in different industries. Each time they would task some government department like the Department of Agriculture, Interior, Labor, Commerce or Treasury with the job of enforcing that law and writing and enforcing specific regulation. Consequently, over the years numerous regulatory agencies came to be located throughout the Federal bureaucracy.

All OSHA did was reorganize all these regulatory agencies under one umbrella organization. It was not accompanied by any new laws or an expansion of the regulatory apparatus.

So there was no reason for the creation of OSHA to create a break in the trend of workplace facilities and just another display of a little knowledge being a dangerous thing.

Also notice that it is not on a log scale, so it is essentially impossible to determine the trend.
For all anyone knows there may have been several trend breaks over this period.

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Recession Indicators

The NBER comittee that officially determines the dates for recessions has a few favorite, or key indicators that it gives much more weight.

One of the indicators is real manufacturing and trade sales. Not many people pay much attention to it because it does not have its own press release and wall street traders do not bet on it. It is an old Business Conditions Digest (BCD) that use to be published by the Bureau of Economic Analysis. But when they quit doing the BCD and the leading indicator the Conference Board took over responsibility of publishing this series because it is a component of the coincident index. But as the following chart it has a very good record of signaling recession turning points..

But something strange has been happening to this index over the last few months of 2007.
It has been improving and actually implies that growth may be accelerating, not slowing.

One probable reason for the recent strength is that it includes exports, where growth is very strong.

But if you think the NBER is on the verge of declaring that we are entering a recession this indicator suggest otherwise.

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January Auto Sales

The other big economic report Friday came through late in the afternoon and did not get much attention. But it was also discouraging. Auto sales fell from 16.3 M (SAAR) in December to 15.2 M (SAAR) in January. So we are starting the first quarter with a sharp drop in both employment and demand.

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I have a lot of theories about what caused the long wave in interest rates. Most center on inflation, but here is another interesting chart to make you think about it.

One of the key relationship is that monetary velocity is inversely related to real interest rates
and that has been true for decades — including the 1930s.

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Bond Market Long Wave

Oldvet– very good on the long run bond market.

Here is another chart to put that trend in perspective.

I suspect that to get back to the solid trend line it will take a Japaneses type depression scenario.

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The Financial Accelerator, Revisited

The Financial Accelerator, Revisited

This was on the WSJ blog by Greg Ip and I though it was worth passing on.

Fed Chairman Ben Bernanke’s newfound urgency in addressing the risk of recession can be traced in part to the insights he gleaned from his pioneering research on the financial system and the Great Depression.

[Ben Bernanke]

Last June, Mr. Bernanke delivered a speech on the “financial accelerator,” which describes how weakness in the financial system can compound an economic downturn. He developed the theory in the 1980s to explain the depth and duration of the Great Depression, and later expanded on it with the collaboration of Mark Gertler at New York University.

Real Time Economics wrote last June: Mr. Bernanke has spoken on countless issues … But to understand where his economic heart truly lies, read the speech he delivered at the Atlanta Fed today, “The Financial Accelerator and the Credit Channel.” Mr. Bernanke doesn’t say it, but the current crisis in the subprime mortgage market may be a perfect illustration of the financial accelerator at work today.

Rereading that speech helps explain the new urgency in Mr. Bernanke’s assessment of economic conditions, which was manifested in Tuesday’s 0.75 percentage point cut and a likely cut next week, and his advocacy of fiscal stimulus.

Fed commentary these days contains a lot of references to “feedback loops” and self-reinforcing spirals of declining confidence and asset prices. Those are the hallmark of the financial accelerator in action. They give the current economic cycle a different cast from the typical post-war cycle which was driven largely by trends in inventories, employment and, in 2001, capital investment.

On Jan. 11, governor Frederic Mishkin said in a speech: “An economic downturn tends to generate even greater uncertainty about asset values, which could initiate an adverse feedback loop in which the financial disruption restrains economic activity; such a situation could lead to greater uncertainty and increased financial disruption, causing a further deterioration in macroeconomic activity, and so on. In the academic literature, this phenomenon is generally referred to as the financial accelerator.”

It’s worth paying close attention to Mr. Mishkin’s views because he was an occasional collaborator of Mr. Bernanke when the two were in academia together, and at the Fed they continue to consult each other on research topics of common interest that often crop up in speeches.

In a separate speech Jan. 10, Mr. Bernanke, foreshadowing this week’s action , said: “economic or financial news has the potential to increase financial strains and to lead to further constraints on the supply of credit to households and businesses.” Note the reference to “news”: it’s not just economic and financial developments but how market confidence is affected by news of those developments that can aggravate the downward spiral. The Fed, he said, was “prepared to act in a decisive and timely manner and, in particular, to counter any adverse dynamics that might threaten economic or financial stability.”

That may explain why just the threat of a steep stock decline Tuesday played a part in Mr. Bernanke’s decision to cut rates: allowing the drop to play out may have had confidence-damaging consequences beyond the lost stock market wealth. The Fed, he felt, had an obligation to try and stop those effects from propagating, even at the price of appearing too ready to respond to stock prices.

“Given the weakened state of financial institutions, a sharp asset price contraction had the potential to significantly disrupt credit flows and thus do significant harm to the real economy,” Mr. Gertler said in an email Friday. “The Fed action offset this potentially disruptive chain of events. Of course, we can’t do the counterfactual of examining what would have happened had the Fed done nothing (just as we can’t for the intervention last August.) But many would agree that a real disaster might have ensued.”

While the financial accelerator conjures up the Great Depression, that almost certainly overstates the risks today. There are many institutional differences, from federal deposit insurance and the government’s larger role in economic activity to absence of the gold standard that militate against a repeat. But the financial accelerator can still produce nasty results; Paul Krugman has argued it explains the severity of the economic pain many Asian countries felt during their financial crisis in the late 1990s.

Does their awareness of the financial accelerator today imply anything for what Fed officials do at next week’s meeting? It’s hard to say, but it would certainly reinforce the Fed’s current inclination to err on the side of doing more rather than less than it ultimately thinks necessary. –Greg Ip

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In this mornings New York Times Bruce Bartlett published a nice list of anti recession measures by Congress and makes the point that they are always too late. However, if you read the list of 14 different measures he list you find that 12 of them are for public works programs and he is completely correct that they were too late to be effective anti recession measures. He is not saying anything new. It has been widely known for years that the time needed for Washington to act meant that using counter cyclical fiscal was very hard and it was usually too late. This has been standard main stream economics for years.

But two of the programs were tax cuts or tax rebates. One in 1975 and the other in 2001. Yes, he is right that the 1975 act came at the end of the recession, but the 2001 measure was very timely and the tax cut hit before the recession ended. I lived through the 1975 recession and remember clearly that the tax cuts played a major role in the 1975 consumer spending rebound.
Interestingly, Greenspan was the individual who convinced Ford to target the tax cuts to the middle class by pointing out that if President Ford wanted to buy a new car he would buy one and the tax cut would not make much difference. But for the typical middle class and/or poorer citizens liquidity constraints meant that the tax cut could make a significant difference in the car purchase decision. Moreover, as I pointed out yesterday the 2001 stimulus also clearly paid a significant role in the consumer spending rebound just as it did in 1975. The CBO just published a report where they found that one third of the 2001 tax rebate was spent in the first three months and two-thirds within 6 months.

Interestingly, the argument against tax cut being used by many bloggers is Milton Freedman’s
permanent income hypothesis. But even he recognized that this only applied to individuals that were not facing liquidity constraints — a very small segment of the population.

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Do tax rebates work?

I love the articles we are now seeing that the 2001 tax cut did not work.

But look at what happened to real retail sales right after the 2001 tax rebates were implemented. The US experienced a very large surge in real retail sales that were
not adequately explained by the usual factors. ( see the jump above the arrow in the chart)

This looks a lot more convincing to me about the impact of the stimulous then some survey asking people to remember how they spent the money. This is especially true when the biggest use of the rebate was to pay off debt, and this free up resources that would have been used for debt servicing to spend on other things. The retail sales data implies that is what happened.

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